Monday, October 24, 2005
Investors Search for the Next Google
For the first time since the dot-com bust, venture capital investments in Internet companies are surging. Call it the Google effect. With investment in Internet companies climbing again after several years of decline, the quest is on to find, and fund, the next Google -- or companies with cutting-edge technology that could be acquired by Google or rivals like Yahoo or Microsoft's MSN as they expand their footprints in Internet search arenas.
Venture firms funded 219 Internet deals in the first half of 2005, putting them on pace to exceed last year's 413 deals, according to figures from the Thompson Financial Venture Economics research firm. That would mark the first annual increase in Internet deals since 2000. And the average size of Internet deals is also on the upswing, climbing to US$7.1 million in the first half of this year from $6.6 million last year. "People in the venture business are now looking at companies they might not have looked at a couple of years ago because of Google," suggested Axel Bichara, a senior partner at Atlas Venture in Waltham, Mass. But when entrepreneurs come calling at venture firms these days, foraging for money to bankroll Internet start-ups, they can expect to be grilled about their approach to the fast-growing Google, which boasts a market value of about $90 billion and more than $7 billion in cash. "They are now a formidable presence that needs to be considered when making any kind of investment, whether it's on the enterprise side or the consumer side," said Scott Tobin, general partner at Battery Ventures in Wellesley. Tobin said the Google effect often figures into which Internet companies can line up backers. There are two sides to the Google effect. Even as some investors are casting a skeptical eye on start-ups thought vulnerable to Google, others are aggressively funding start-ups seeking to carve out niches in the expanding Internet business model Google has pioneered.
Every start-up in the Internet field needs a strategy for fending off, partnering with, or differentiating itself from Google. And it's not only potential investors who are demanding to see the strategy. Google is also part of the conversation with job prospects and would-be customers. "The venture guys are very interested in companies in the Internet space," affirmed Jim Baum, the president and chief executive of Endeca Technologies of Cambridge, Mass., a company that helps consumers navigate the Web sites of giant retailers like Wal-Mart Stores and The Home Depot. "But for someone like us, you end up having to answer the question: 'How are you going to compete with Google?'" In many ways, Google has become this decade's Microsoft, a high-tech behemoth that is by turns admired, envied, and feared by nearly everyone in the industry because of its cash horde and constantly evolving business model. Google started in 1998 as a search engine, then developed a profitable business built on Internet advertising, and recently has begun investing in everything from wireless networks to an Internet-based computer platform, threatening companies in markets as far-flung as telecommunications and enterprise software . Its share price has more than tripled since its initial public offering in August 2004. "There's an 800-pound gorilla in the room," said Bob Davis, partner at Highland Capital in Lexington, Mass. "Any smart upstart in the Internet space needs a clear view of Google, and a strategy for dealing with it."
Start-ups, in fact, are working to sharpen their strategies. Endeca hired a principal evangelist, Paul Sonderegger, to convince customers that its guided navigation software is superior to Google's hyperlink analysis in helping consumers find their way around retail sites. "To get the Google experience on a retailer's website, you need someone other than Google," Sonderegger said. SideStep Inc., a start-up in Santa Clara, Calif., down the road from the "Googleplex," the headquarters of Google in Mountain View, Calif., has focused on the field of travel search. SideStep buys ads from Google, but competes for customers making travel plans. "If you're maniacally focused on one market, as we are, you're going to do it better," said Phil Carpenter, SideStep's vice president of marketing. Tim DeMello raised $3.1 million from angel investors last month for his Boston start-up Ziggs Inc., which targets the niche of people search. "There's a lot of room for people doing something more specialized," said DeMello, Ziggs chief executive. "If we went out with a general search engine, I think that would have been a tough sell."
Brought to you by Guardian eCommerce.
Venture firms funded 219 Internet deals in the first half of 2005, putting them on pace to exceed last year's 413 deals, according to figures from the Thompson Financial Venture Economics research firm. That would mark the first annual increase in Internet deals since 2000. And the average size of Internet deals is also on the upswing, climbing to US$7.1 million in the first half of this year from $6.6 million last year. "People in the venture business are now looking at companies they might not have looked at a couple of years ago because of Google," suggested Axel Bichara, a senior partner at Atlas Venture in Waltham, Mass. But when entrepreneurs come calling at venture firms these days, foraging for money to bankroll Internet start-ups, they can expect to be grilled about their approach to the fast-growing Google, which boasts a market value of about $90 billion and more than $7 billion in cash. "They are now a formidable presence that needs to be considered when making any kind of investment, whether it's on the enterprise side or the consumer side," said Scott Tobin, general partner at Battery Ventures in Wellesley. Tobin said the Google effect often figures into which Internet companies can line up backers. There are two sides to the Google effect. Even as some investors are casting a skeptical eye on start-ups thought vulnerable to Google, others are aggressively funding start-ups seeking to carve out niches in the expanding Internet business model Google has pioneered.
Every start-up in the Internet field needs a strategy for fending off, partnering with, or differentiating itself from Google. And it's not only potential investors who are demanding to see the strategy. Google is also part of the conversation with job prospects and would-be customers. "The venture guys are very interested in companies in the Internet space," affirmed Jim Baum, the president and chief executive of Endeca Technologies of Cambridge, Mass., a company that helps consumers navigate the Web sites of giant retailers like Wal-Mart Stores and The Home Depot. "But for someone like us, you end up having to answer the question: 'How are you going to compete with Google?'" In many ways, Google has become this decade's Microsoft, a high-tech behemoth that is by turns admired, envied, and feared by nearly everyone in the industry because of its cash horde and constantly evolving business model. Google started in 1998 as a search engine, then developed a profitable business built on Internet advertising, and recently has begun investing in everything from wireless networks to an Internet-based computer platform, threatening companies in markets as far-flung as telecommunications and enterprise software . Its share price has more than tripled since its initial public offering in August 2004. "There's an 800-pound gorilla in the room," said Bob Davis, partner at Highland Capital in Lexington, Mass. "Any smart upstart in the Internet space needs a clear view of Google, and a strategy for dealing with it."
Start-ups, in fact, are working to sharpen their strategies. Endeca hired a principal evangelist, Paul Sonderegger, to convince customers that its guided navigation software is superior to Google's hyperlink analysis in helping consumers find their way around retail sites. "To get the Google experience on a retailer's website, you need someone other than Google," Sonderegger said. SideStep Inc., a start-up in Santa Clara, Calif., down the road from the "Googleplex," the headquarters of Google in Mountain View, Calif., has focused on the field of travel search. SideStep buys ads from Google, but competes for customers making travel plans. "If you're maniacally focused on one market, as we are, you're going to do it better," said Phil Carpenter, SideStep's vice president of marketing. Tim DeMello raised $3.1 million from angel investors last month for his Boston start-up Ziggs Inc., which targets the niche of people search. "There's a lot of room for people doing something more specialized," said DeMello, Ziggs chief executive. "If we went out with a general search engine, I think that would have been a tough sell."
Brought to you by Guardian eCommerce.
